Thunderbird Entertainment Group Inc

XTSX:TBRD

Earnings Call Transcript 2021-Q2

[Operator]

Thank you for joining us. We are here to provide a corporate update and report on Thunderbird Entertainment Group's Second Quarter 2021 Fiscal Results, which ended December 31, 2020. Speaking on today's call are Ms. Jennifer Twiner McCarron, Thunderbird's CEO; and Ms. Barb Harwood, Thunderbird's CFO. Ms. Twiner McCarron will provide a strategic overview of Thunderbird Entertainment Group, and Ms. Harwood will review the company's Q2 financials. [Operator Instructions] Alternatively, if you have any questions, you can call [phone] or e-mail [e-mail], and the company will follow-up directly after the call.[Operator Instructions] I'd like to remind everyone that certain statements made on today's call will be forward-looking and constitute forward-looking statements or forward-looking information under applicable securities laws. Forward-looking statements and information discussed on this conference call include, but are not limited to, statements with respect to the company's objectives, goals or future plans and the business and operation of the company. Forward-looking statements are necessarily based on a number of estimates and assumptions that, while considered reasonable, are subject to known and unknown risks, uncertainties and other factors, which may cause actual results and future events to differ materially from those expressed or implied by such forward-looking statements. Such factors include, but are not limited to, general business, economic and social uncertainties, litigation, legislative, environmental and other judicial regulatory, political and competitive developments. Those additional risks set out in the company's filing statements and other public documents filed on SEDAR at www.sedar.com and other matters discussed in the company's year-end news release.Although the company believes that the assumptions and factors used in preparing these forward-looking statements are reasonable, undue reliance should not be placed on these statements, which only apply as of the date of this presentation, and no assurance can be given that such statements will occur in the disclosed time frames or at all. Except when required by law, the company disclaims any intention or obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. For your convenience, the press release, the MD&A and unaudited financial statements for the second quarter of 2021 of Thunderbird Entertainment Group, which ended December 31, 2020, are filed on SEDAR and are available online under the Investors section of our website. We do not expect to update forward-looking statements continually as conditions change.This conference is being webcast live, and the archive will be available on the company's website at www.thunderbird.tv following today's call. Please note that Thunderbird reports in Canadian dollars, unless otherwise stated. Ms. Twiner McCarron will now provide the corporate update.

[Jennifer Twiner McCarron, President, CEO & Director]

Good morning, everyone. I'm Jennifer Twiner McCarron, the President and CEO of Thunderbird Entertainment Group. Thank you all so much for joining Barb and I today as we provide an overview of Thunderbird's corporate results in the second quarter of fiscal 2021, which ended on December 31, 2020. Afterwards, we're looking forward to your questions.We are so proud of the resiliency and talent of our award-winning teams. The Q2 results underscore the incredible work happening at Thunderbird and we can't wait to walk you through it all.Q2 was a fantastic quarter for Thunderbird, and the company continued to deepen relationships with our partners, such as Netflix, Disney, HBO Max, Bell and CBC to list a few, by meeting all delivery targets and reliably delivering premium quality content. Our hard work, reputation for trust, and incredible artistry is paying off in extremely important ways as Thunderbird is now winning major high-profile projects over other studios, many of them much larger than we are. On top of that, we have launched a global distribution and consumer products division, which officially launched in January 2021. This division is being led by industry veteran, Richard Goldsmith. We are beyond thrilled to have Richard as part of our new leadership team and to work with Richard as he lists our world-class brands to new heights, opening up ancillary revenue streams through merchandise, video games, toys, bedsheets, you name it.The new division and our library, in addition to the premium content that we develop and produce creates a content trifecta. Thunderbird can produce content, we can license and distribute its content, and now we can leverage our own content through all forms of cross media exploitation. We now have all the tools and the talent that will enable us to become the next major global studio.I will now pass things over to Barb to go over our Q2 numbers, and then I'll follow-up with more corporate updates. Thanks so much, and over to you, Barb.

[Barb Harwood, Chief Financial Officer]

Thanks, Jen. Hi, everybody, and thanks for joining us today. During Q2, we continued the growth pattern that has occurred over the past 12 months as reflected in our increased revenue and adjusted EBITDA in our positive free cash flow.Turning now to our Q2 results. Revenue for the 3 and 6 months of fiscal 2021 was $28 million and $47.7 million as compared to $14.1 million and $30.6 million, increases of 98% and 56%, respectively. Our licensing and distribution revenues increased by 272% or $6.4 million in the quarter from $2.4 million to $8.8 million. Just a reminder that the licensing and distribution revenues are from our own IP-owned titles. For the first 6 months of the year, licensing revenue increased by 63% from $8.5 million to $13.8 million. The difference relates to the timing of delivery of 2 of our IP shows, Last Kids on Earth and Highway Thru Hell Season 9. We delivered 10 episodes of Last Kids on Earth, and 6 episodes of Highway Thru Hell in Q2 of 2021 as compared to 7 episodes of Highway Thru Hell in Q2 2020.During the first 6 months of the year, we delivered a total of 10 episodes of Last Kids on Earth as compared to 3 episodes in the first 6 months of our fiscal 2020 fiscal. Of note, in the first 6 months of the year, $34 million or 70% of the total revenue, $47.7 million, relates to production services work and is reflective of almost a full year of the LA Studio and our continued growth in this area of the company. In production service, we had 19 active service productions in Q2 of 2021 as compared to 17 active service productions in Q2 of 2020, with a general increase in the size of the service project over the last period.Adjusted EBITDA was $5.2 million and $10 million in the 3 and 6 months of fiscal 2021, as compared to $2 million and $5.7 million in the previous periods, increases of 160% and 76%. Again, this increase was largely due to growth in animation production services, as well as a smaller but significant increase in the number of IP projects recognized in the quarter.Positive free cash flow was $4.4 million and $5.7 million for the 3 and 6 months as compared to negative $3.8 million and $0.2 million for the compared periods. And finally, we continue to have a strong balance sheet with 0 corporate debt.Back to you, Jen.

[Jennifer Twiner McCarron, President, CEO & Director]

Thanks, Barb. And before I dive into our second quarter corporate highlights, I want to acknowledge that after many years of incredible service, the company's founder and Director, Tim Gamble, has decided that at 65, it's the right time for him to move on and to pursue other endeavors. Tim is moving on, while the company is in the best place possible. Thunderbird started with Tim at the helm, and his leadership has been crucial in getting the company to where it's at today. Personally, it has been an honor to work alongside Tim and his integrity, kindness and encouragement of all levels of management has been wonderful, and I will try and bring this forward in every way.Shifting to Q2, Thunderbird was in production on 21 projects with 10 of them being owned or partner managed. Our Kids & Family Division, Atomic Cartoons was in various stages of production on 13 animated series and 2 feature length animation projects, 15 productions in total. This included Mighty Express with Spin Master for Netflix, Lego Star Wars Holiday Special for Disney+, Molly of Denali for GBH and PBS; Trolls: TrollsTopia in partnership with DreamWorks for Hulu and Peacock; and we are also in production on another Curious George feature for Peacock, plus many more that we can't yet announce. I can't wait to tell you about them.And while we're deeply proud of every Thunderbird production, Molly of Denali continues to turn heads around the world and be a shining star for our company. After winning a Peabody and a Television Critics Association Award in 2020, Molly of Denali recently won a 2021 Kidscreen Award in the category of best inclusivity.Diversity and inclusivity is a cornerstone of our company's culture, and we could not be more proud of the team. Speaking of recognitions, LEGO Jurassic World: Legend of Nublar, has also been recently nominated for a Nickelodeon Kids' Choice Award. The winner will be announced in March in 2021, so pull out your green sign.The work of our teams speak for itself. However, receiving nominations and recognitions from critics and peers in the industry is definitely an honor and fully represents the top-tier work happening in all areas of Thunderbird.The Kids & Family Division is busier than ever, and our bids and increase tripled year-over-year from January to October 2019 to January to October 2020. We've also added more than 400 crew members to our team on the animation side of the business to keep up with the demand. We are fully booked through 2021 and have visibility well into 2023.Our factual and scripted division, Great Pacific Media, was in production on 4 factual series and 1 documentary special in the second quarter. Highway Thru Hell, seasons 9 and 10; Heavy Rescue: 401, seasons 5 and 6; $ave My Reno, season 4; Mud Mountain Haulers, season 1; and the Teenager and the Lost Mayan City, which is a documentary for CBC.In Q2, we announced plans to partner with Underknown to bring their multibillion view Webby Award-winning series, What If to television as a factual series, and we announced the development of a premium scripted drama series entitled Von Braun: Dreamer of Space, Engineer of War. Simon Barry, the mastermind behind hits like Continuum and Warrior Nun is attached to this series, and we are thrilled to collaborate with him. Thunderbird selected this story to launch its new initiative to develop dramatic scripted content that is based on real events.We acquired the book's IP from the Smithsonian Institute in 2019, see this production, along with several others in development as a great way to expand our scripted programming. Also on the scripted side, we are in production on Kim’s Convenience in Q2, which had its fifth season premiere in January 2021. There was a huge amount of press around this premiere with stories appearing in the Hollywood Reporter, Screen Rant, BuzzFeed, the Toronto Star, the Globe and Mail and the list goes on. You can also catch 2 of its breakout stars and other exciting projects. Simu Liu will be the first Asian actor to start in a Marvel superhero film later this year. And Paul Sun-Hyung Lee is currently appearing in upsides of The Mandalorian on Disney+. Kim’s wasn't the only Thunderbird production that celebrated a premiere in early 2021. Both spinoffs from our hit series Highway Thru Hell debate new seasons in January. Highway's initial spin-off, Heavy Rescue: 401, premiered its fifth season, and second spin-off, Mud Mountain Haulers premiered its first. Based on early feedback and audience responses to Mud Mountain Haulers, we are confident it will follow suit attracting a loyal viewership across the franchise. Kim’s Convenience, Highway Thru Hell, Heavy Rescue: 401 and Mud Mountain Haulers are all company IP and reflect Thunderbird's focus on owning, developing and exploiting IP. Another owned IP factual production, $ave My Reno, will have its fourth season premiere in March on HDTV. Production on season 4 began in the early days of the pandemic and through ingenuity and creativity, the team embraced virtual processes to ensure safety. When filming commenced, it was with smaller different crews and health and safety were prioritized throughout the entire process. The result is 14 new episodes full of cost-saving renovation tips and tricks on must-do projects at a time when many people are looking for a home improve projects.Additional 2021 premiere include season 4 Hello Ninja on Netflix, which was recently recognized by TVision Insights as one of the top 5 streaming shows on Netflix this past January; and Mighty Express season 2, which started streaming on Netflix in February. Our 2021 premiers reflect the 2 main drivers of our company, the Kids & Family division and the Factual division. Both Kids and Family and Factual content have emerged as key components in programming strategies used by streaming platforms to glue the important co-viewing audience, which refers to families at home watching content together, especially during these unprecedented times. And there is no insight -- sight in end for demand for this content.In 2020, the strength of the Kids and Family offering helped Netflix surpass 200 million subscribers. Reed Hastings noted that better-than-expected subscribers in Q4 for Netflix were largely due to the power of the animated family movie.Disney+ has proven to be far more popular than anyone could have imagined, accumulating over 94 million subscribers in its first year, emboldening the company's management to predict that it will boast as many as 260 million subscribers at some point in 2024.Discovery Plus launched in January and is dedicated entirely to Factual production. Paramount Plus is on the horizon with a March launch planned.We are so grateful to be in a pandemic-resistant industry, and our numbers do not yet reflect the incredible push for content that we have seen during COVID. The growth to date is purely from all the new buyers coming online and the push for high quality, authentic content, which no one is better positioned to deliver on than Thunderbird. Additionally, working from home is not only good for with our teams and partners, but it's enabled us to go beyond our 4 studio walls and scale up to meet this demand like never before.It is an amazing time to be in the business of content creation, and Thunderbird is well on its way to becoming the next major global studio. The Thunderbird's management team is excited by the opportunities that lie ahead. We are also so thankful for all your support as Thunderbird investors, and we look forward to keeping you apprised of our progress. We also look forward to connecting with you at industry events such as the upcoming LD Micro Conference, the ROTH Conference and TSX women's leadership event. Thank you all so much for joining us today. And now we can open up for the Q&A. Thank you.

[Operator]

[Operator Instructions] Aravinda Galappatthige with Canaccord Genuity.

[Aravinda Suranimala Galappatthige, Managing Director]

Congrats on the quarter, Jen and team. I have a couple of questions for Jen and a few accounting for Barb as well. I'll start with you, Jen. On the -- obviously, when you see results like this, and you've been posting good results for several quarters now back to back. Obviously, when investors see these kinds of numbers, the natural question that comes up is around the stability. I know that you -- generally in this business, you do have some visibility, given the pipeline of production that you have and the commitments that you have. Is there any color that you can provide as to what that pipeline looks like? Just to sort of make sure that investors understand the outlook, particularly in the near term?

[Jennifer Twiner McCarron, President, CEO & Director]

Absolutely. Well, I think it's safe to say we could expect similar levels of growth that we saw from '19 to '20 through '20 to '21. It's important to look at our business on an annual basis, rather than quarter-over-quarter, because of timing of deliveries and whatnot. Sometimes quarters can be lumpy. So I think it's -- our growth trajectory is great. We have amazing visibility well into the future with lots of new growth streams coming our way. But really, I would look at our company on an annual basis to see the incredible growth. And debt-free way, we've -- the teams have managed to do this organically and stay debt-free. It's remarkable.

[Aravinda Suranimala Galappatthige, Managing Director]

Absolutely. And then on the question of mix, clearly, you've capitalized on the opportunity on the service side that partly arose during sort of the COVID-related limitations. The current mix is almost 70-30, appears to me in the direction of service. I know that your long-term objective is to move that back towards proprietary production. Can you maybe speak to that? Did you expect this sort of mix to hold up for a little bit before things change? Or should we expect that shift to work a little bit sooner?

[Jennifer Twiner McCarron, President, CEO & Director]

No. It will gradually shift. And I think of note is that just the way things are recognized from an accounting perspective. Increasingly, we have partnership models, which is where we're hired to do work tip to tail. We get cash flow throughout similar to service, but we do have significant ownership in back end, all across media exploitation. And we all know the power of the brand when it goes off, that is where all of the upside is. So essentially, we're working towards a nice 50-50 mix, bringing in our own consumer products and distribution division. Further allows us to lever that because now we can look at deals and the financing of it all and say, well, we're not going to be giving 30% to 40% away to a third-party distributor, we're maintaining that ownership. This makes more sense. So we have about 50 projects coming up through the pipeline, in both Great Pacific and Atomic, IP. And we're having a lot of like selling. So it's great.

[Aravinda Suranimala Galappatthige, Managing Director]

That's great. I have 2 for Barb. The first is around -- I know you talked about sort of the accounting sort of configuration and the way that you've changed the way that you account for some of the expenses in terms of amortizing it alongside the delivery of productions. Now that we have both the numbers in the sense that when I look at the prior period, I can see the EBITDA under the old method and the new method. The historical numbers seem to generally suggest that the uptick that you got from EBITDA -- in EBITDA was around, call it, just under $0.5 million. But when I look at Q2 '20, so the prior year quarter, it looks like under the old method, you posted $780,000 or $770,000 in EBITDA, but now the prior year period is over $2 million. So that variance appears to have sort of tripled. I mean it's $1.2 million instead of $400,000. I was wondering if you can sort of help us understand that.

[Barb Harwood, Chief Financial Officer]

Yes. Are you looking at the comparatives from our last year filed as compared -- or like in the notes, the translation?

[Aravinda Suranimala Galappatthige, Managing Director]

Yes. Yes.

[Barb Harwood, Chief Financial Officer]

Yes, yes. I might have to get back to you on that because I don't have that analysis in my head, if that's okay, we can take it off-line.

[Aravinda Suranimala Galappatthige, Managing Director]

Okay. Okay. No problem. And then maybe just, Barb, I'll ask you about the sort of the cadence. I know you've talked about that being a little less predictable now. But we know that very generally, historically, Thunderbird's strongest quarter is Q3. I was wondering if you can speak to that. Will that sort of sustain? And also around the deliveries, are there any kind of bulky deliveries we should be thinking about similar to sort of the 10 episodes that we saw in Q2 with Last Kids?

[Barb Harwood, Chief Financial Officer]

Yes. Sure. As Jen mentioned previously in this call, we had quite a lot of the Factual premiers in 2021, in Q3, Mud Mountain, Heavy Rescue: 401, the remainder of the Highway Thru Hell episodes. So that is going to keep it sort of normal pattern. As compared to last year because that's sort of the -- right now in Q3, is the time when a lot of our broadcaster-related IP shows get premiered and recognized.

[Jennifer Twiner McCarron, President, CEO & Director]

Yes. We're expecting a very, very strong Q3, Aravinda.

[Operator]

Laura Martin with Needham.

[Laura Anne Martin, Senior Analyst]

Maybe a couple for Jen. So let's focus on data. What kind of data do Netflix and Disney and Peacock and these services give you? So is that getting better because Netflix isn't totally bad, it's sharing even viewing data of your content. Because that is actually going to help you maximize not only library value when the IP reverts to you, but also things like consumer products, if you know the customer name. So could you go through the various people you produce for and tell us the extent of the data you get from them, please?

[Jennifer Twiner McCarron, President, CEO & Director]

Certainly. Great question. And hi, Laura. It's really mostly measured on completion rates. So how a big score is, did they complete 90% of the episode, did they complete 90% of the series. So those are the type of metrics. And of course, on our Factual side, we 100% get a lot of data because a lot of it's still on the traditional broadcast. We can check the viewership every time of program errors, and we can see how well the Factual shows are doing. So it's increasingly becoming such that -- just as I referenced Hello Ninja, there's companies out there that are able to take the data and determine how things are streaming. So we learned that Hello Ninja was in the top 5 streamed shows on Netflix in January 2021. And we're able to take that data. We're still not at a place with all of the streamers that we work with, where we can take concrete numbers to our buyers that when we're setting up all forms of cross media exploitation. But there's a lot of anecdotal ways that we can, especially when we're working off a book property, like the Last Kids on Earth, we can see that it's been streaming in the top 10 shows of all Netflix shows, not just kids' shows. That's tangibly apparent right up there with the British Baking Show. And we can see that all of the books coming out are right in the top 10 bestseller list between Diary of a Wimpy Kid and Harry Potter. And so those -- all of that -- and winning awards, winning an Emmy Award for that show. All of that comes to play into great product placement with whoever we're dealing with in the ancillary businesses.

[Laura Anne Martin, Senior Analyst]

Would it be worth to you to take a lower license fee in order to hold on to more data going forward, staying on data?

[Jennifer Twiner McCarron, President, CEO & Director]

You mean if we were able to get more data from the streamers and be paid like?

[Laura Anne Martin, Senior Analyst]

Yes. Yes.

[Jennifer Twiner McCarron, President, CEO & Director]

It's a really good question. I haven't done that analysis. I think their data is part of their proprietary, what's the key to their success. I don't necessarily think so. A lower license fee for the data is probably not worth it. I mean we're building global brands that will speak for themselves.

[Laura Anne Martin, Senior Analyst]

Okay. My other question is on Slide 28, I think it's 28, might be 48, actually. But anyway, it was about the recent -- the November passing of the new rules in Canada, which I knew nothing about. This sort of feels bad for you to me, maybe I'm -- but if you guys are the incumbent that everybody knows, it's a premier Canadian provider. It feels to me like if Canada puts in more restrictions and allocates more money. That just encourages your competitors to enter the market. Am I reading that incorrectly from a strategic position of you guys?

[Jennifer Twiner McCarron, President, CEO & Director]

Yes. I would say you are reading that a little differently than I would interpret. Strategically, this is great for us because the bill that's getting passed is similar to one that exists in France, and it's saying to all of the streamers, hey, if you want to stream in Canada, you have to participate in the Canadian system, which means you can't just benefit from having subscribers, you have to lift Canadian creators. You have to promise that a certain percentage of your profits will go to Canadian companies. When the streamers are accepting of that, they're going to go to their most trusted providers to ensure that their money is being well spent in Canada. And as a company, we've always wanted to make global content that appeals worldwide, not just Canadian. We want to lift Canadian companies and Canadian creators. But at the same time, because we were -- really deepened our trust with all of the streamers during 2020, our company got off-site [ with had a beat ]. We didn't miss one delivery. We didn't go over budget on anyone. We didn't have any problem. That just really further ingratiated us to everyone, which will mean when it comes time for all the streamers to spend that money, they're going to go to their trusted, most trusted providers like Thunderbird.

[Laura Anne Martin, Senior Analyst]

That's excellent. Congratulations on these great numbers. You're my only stock that's green today on a red page. So congratulations.

[Jennifer Twiner McCarron, President, CEO & Director]

Thank you for your support, Laura. I always love hearing from you.

[Operator]

[Operator Instructions] David McFadgen with Cormark.

[David John McFadgen, Director of Institutional Equity Research]

A couple of questions. Maybe just a clarification, first of all. So Jen, you said earlier on this call that you expect to have a strong Q3. Obviously, Q2 was quite strong. Can you give us what your outlook would be for Q4? I'm just wondering if this fiscal '21 year is going to come out better than what I'm thinking it will be.

[Jennifer Twiner McCarron, President, CEO & Director]

Well, I will say that Q3 is looking phenomenal. And Q4 will be flatter than -- like not -- Q4 is always a little flatter for us, but by Q3, the year is pretty much in the books, and it's fantastic. So it is following the pattern of a very large Q3, a slightly flatter Q4. But again, looking at us on an annual basis, we should be looking, at least, to similar levels of growth that we saw from '19 to '20, we'll see from '20 to '21.

[David John McFadgen, Director of Institutional Equity Research]

Okay. And then earlier on the call, you mentioned that you have visibility well into fiscal 2023. Were you referring to Great Pacific Media? Or you were referring also to Atomic Cartoons?

[Jennifer Twiner McCarron, President, CEO & Director]

To both. Yes, to both. We always look at our capacity, constantly juggling it, we're booking work into that -- those times and being able to be strategic about shows that we own or partnerships that we're forging, saying, hey, we want to start here and just really keeping that nice -- part of our goal is to not have huge peaks and valleys because that's expensive. It doesn't allow us to optimize as much as we've been able to. When we keep things consistent with our headcount, with the properties we're doing, we can further optimize and increase shareholder value.

[David John McFadgen, Director of Institutional Equity Research]

Okay. And then prior to the quarter being reported, you put out a press release talking about the fact that you've launched a global consumer products division. I was wondering if you could give us an idea on what titles of IP that you own that you think you'll be targeting initially with the launch of this new division?

[Jennifer Twiner McCarron, President, CEO & Director]

Yes, great question. So I think initially, I can't speak to all of them, but Eerie, I believe we've announced another collaboration, New York Times best seller with Max Brallier from Last Kids on Earth; Tokidoki, which is the insanely popular Japanese lifestyle brands, we've partnered up with them. Nate Create is a partnership with Henson Company from The Muppets fame. And we're also looking now traditionally all of the amazing work at Great Pacific. We've gone to a third-party distributor. They fully own almost all of their content. But now we're looking at ways to -- we've never taken a stab at leveraging any of that content, any type of cross media exploitation. Highway Thru Hell is the most popular Factual show in North America. And we haven't done anything to really maximize or leverage that ownership in terms of ancillary business. So we're taking a hard look at all of the shows there seeing what we can do. And going forward, we're going to be pulling all of that in-house because we have those capabilities now.

[David John McFadgen, Director of Institutional Equity Research]

Okay. And then just a question on the streamers. I was reading an article the other day talk about HBO Max and how it really wants to ramp up its family kids offering on its service aggressively out. They're trying to get that kind of content. Are you in discussions at all with HBO Max, both on potential future shows?

[Jennifer Twiner McCarron, President, CEO & Director]

Yes, heavily, heavily. Yes, stay tuned for some announcements. HBO Max is great. They've always been synonymous with quality. And I think like all of the other streamers, HBO Max knows that you have to glue kids and family to glue subscribers. That's what all of the data analytics show. People are way less likely to subscribe and unsubscribe if kids and family are glued. So Italy is the stickiest for all of the streamers and having a really robust kids and family division is a cornerstone of everyone's strategy.

[Operator]

Mitchell Sacks with Grand Slam Asset.

[Mitchell Lester Sacks, Chief Executive Officer]

Congrats, by the way, on a fabulous quarter. First question has to do with, as you move into more, I guess, owned content, just kind of walk me through as best you can, how the expenses will flow as you're creating this content? Will there be -- will it match in terms of when you're distributing? Or will you actually have some expenses in advance being reported relative to the revenue?

[Jennifer Twiner McCarron, President, CEO & Director]

Yes. Barb, from accounting principle, do you want to speak to how that's going to be recognized?

[Barb Harwood, Chief Financial Officer]

Yes. I mean, being that we're organically building the division in the first couple of years, there will just basically be the expenses of salaries, couple of salaries. It's not going to be a massive build. And then as we -- obviously, as we recognize the expenses that relate to the productions that would follow the normal kind of IP recognition of production cost staying on the balance sheet until we deliver to the consumer and then get revenue being recognized and related to amortization. Does that kind of answer your question?

[Mitchell Lester Sacks, Chief Executive Officer]

Yes, 100%. And then the second piece has to do with your new hire. In terms of starting to recognize lower distribution fees for your own products and I guess getting distribution piece for other products, when do you expect that to start to show up in your gross or operating margins?

[Jennifer Twiner McCarron, President, CEO & Director]

In calendar year -- well, fiscal year '23 and '24 and '25, it really will come on quite strongly.

[Operator]

There are no further questions at this time. I now turn it back over to the Thunderbird leadership team for closing comments.

[Jennifer Twiner McCarron, President, CEO & Director]

I just want to really thank everyone for joining today. We're so proud of the teams and their hard work with this great quarter and the best is yet to come. So thank you again so much, and we're happy to take any follow-up calls for anyone listening in. Have a great day.

[Operator]

This concludes today's conference. We thank you for your participation. You may now disconnect.